Instead of lending to businesses, banks have started lending to the RBI itself.

Mumbai: The Reserve Bank of India is throwing money from its rooftop so that banks lend. Yes, they are lending, but not to you and me, but the RBI itself.

One of the glaring features of Indian banking in the past few months has been that banks are flush with funds, but they are holding back on lending to all those who are in need of credit.

That came to the fore during Governor Shaktikanta Das’ address where he unveiled TLTRO 2.0, a package of measures to keep credit flowing.

He meddled with a tool that hardly got noticed till a few weeks ago. He reduced the reverse repo, the rate it pays banks for parking excess funds with it. The reverse repo rate was cut a quarter point to 3.75 percent. Why?

On March. 27, the first round of RBI measures to counter Covid – 19 triggered lockdown, more than Rs. 3.7 lakh crores of liquidity was pumped in so that those who are facing difficulties to get loans to pay their staff and suppliers get funding. That included a cut in Cash Reserve Ratio, the funds that didn’t receive any interest from the RBI, by 1 percentage point that gave banks Rs. 1.37 lakh crores, and the so called Targeted Long Term Repo Operations (TLTRO).

But what happened was the opposite.

Instead of lending to businesses, banks started lending to the RBI itself. All banks put together have been lending an average of net Rs. 4.36 lakh crores to the RBI between March 27 and April 14, and receiving 4 percent interest on it. On April 15, reverse repo funding surged to Rs. 6.9 lakh crores.

Does today’s rate cut on deposits by banks change the game? Not necessarily.

The assumption behind it is that banks are looking for profits and forcing them to earn lesser amount would lead to them chasing borrowers rather than doing `lazy banking.’

Reality is banks are not bothered about their profits in these testing times. Rather the priority is to avoid piling up bad loans. They want to lend to only those who they see as surviving this scare 100 percent. Anyone less than that is a strict no. Priority is balance sheet and not the profit and loss account.

Instead of improving their risk assessment and management, banks, especially private sector, eliminated a huge chunk of the country from their ecosystem. This attitude has been gathering momentum for nearly two years.

Even today, the RBI is pumping in Rs. 1 lakh crore aimed at NBFCs and specialized lenders such as SIDBI, and NABARD. It would be interesting to see how much banks borrow under this Targeted Long Term Repo Operations (TLTRO 2.0) window to on lend.

RBI’s liquidity measures are well meaning, but the objective of lending is nullified by banks’ risk aversion. Now, it’s not the problem of money, but risk appetite.

Anyone in the shoes of a banker would probably do the same. How does one know whether a business would survive six months from now? What is the guarantee that an individual would not be sacked by his employer?

Risk aversion would keep money flowing back into RBI’s coffers, even if it is at a reduced rate. One way to nudge them to lend could be to use discretion in absorbing funds under the reverse repo regime. The RBI can say it would take only up to Rs. 1 lakh crores and not more. That could force banks to look for opportunities to lend.

Even that may be to top rated firms, but at least the RBI could cut its losses.